Bonds smacked by stocks, new debt

RachelKoning

NEW YORK (CBS.MW) - Treasury securities tumbled Wednesday as the market absorbed a new 2-year Treasury offering alongside the biggest influx of corporate debt to hit the market in several weeks.

The flashier returns of blue-chip stocks gave investors another reason to turn away from the rock-solid government debt sector.

The Dow Jones Industrial Average
DJIA, -1.24%
rallied 129 points, or 1.3 percent, to 10,370. Other major indices followed suit. Read more in Market Snapshot.

Prices often backup ahead of an onslaught of new supply to richen yields and, ideally, build up demand for the new paper. Yield and price move inversely. Adding to the selling, money managers typically unload debt securities to make room in portfolios for the new issues.

The new 2-year earned a high yield of 3.965 percent in an auction that drew healthy demand.

In addition to the 2-year notes, the broader fixed-income arena will have to digest more than $15 billion of investment-grade corporate and agency debt by the end of this week.

Among the week's largest offerings, $3.75 billion is expected from a unit Qwest Communications International Inc. and $3 billion from No. 1 U.S. retailer Wal-Mart.

But in general, participants were sidelined ahead of a key report on growth expected Friday. Gross domestic product, the broadest measure of the economy's performance, is due out that day and should reaffirm views that the economy remains tepid at best. See Economic Preview and economic calendar and forecasts.

"The big number of the week will be GDP," said Bill Hornbarger, chief fixed-income strategist with A.G. Edwards & Sons. He looks for growth at about 1 percent in the second quarter.

"Retail sales this quarter have remained surprisingly strong and the trade deficit narrowed, reducing its drag on the economy," he said.

Many bond investors look for the Federal Reserve to cut another 25 basis points from its lending target when the group meets Aug. 21, but such a move is not assured and investors will scrutinize all economic evidence to gauge the probable reaction from the central bank.

Sales of previously owned homes fell by a smaller-than-expected 0.6 percent in June to an annualized rate of 5.33 million units, above the expected 5.29 million, the National Association of Realtors said in Wednesday's only economic release. Read the full story.

An old 2-year note lost 3/32 at 99 26/32 to yield 3.98 percent or a gain of 4 basis points. A 5-year note shed 8/32 at 99 22/32 to yield 4.69 percent or a gain of 6 basis points.

A 10-year note gave up 17/32 at 98 21/32 to yield 5.18 percent or a gain of 7 basis points. And a 30-year bond was down 30/32 at 96 27/32 to yield 5.59 percent or a gain of 7 basis points.

Yields rise when prices fall because investors demand compensation for taking on the less-desired security.

In the currency sector, dollar/yen edged up 0.1 percent to 124.10 while euro/dollar rose 0.3 percent to 0.8752.

"We believe the combination of easier Fed policy, tax rebates and tax cuts, lower energy prices and the reduction in excess inventories will lead to better economic conditions in the second half of the year," Hornbarger said.

"However, with the dollar strong, foreign economies weak and energy prices moderating, we continue to think the recovery will be accompanied by low inflation. The result will be yields trending sideways into the end of the year."

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